Media intelligence company Isentia Group Ltd (ASX: ISD) issued an update to the market as part of its Annual General Meeting (AGM) presentation this morning.
While there is an extensive overview of the company's prospects contained within, shareholder attention is likely to be dominated by two ominous words: 'Trading Update'.
Here's what you need to know:
- First half Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) will be lower than the prior corresponding period
- Full year revenue and EBITDA is expected to grow in the 'high-single-digit' range
Management appeared to take it on the chin, stating that 'due to decisions made in regards to strategy, new business development and client retention in FY17 (financial year 2017)' the company's Content Marketing segment would report an overall loss.
The loss appears to have something to do with the acquisition of King Content, given that the King Content executive is being replaced, and the team itself is being integrated into Isentia's own organisational structure.
Core businesses are performing in line with expectations, so the downgrade appears to be confined to the Content Marketing segment. Management expects its reshuffling initiatives to return the segment to growth in the second half, resulting in higher earnings for the full year.
Unfortunately, Isentia shares are likely to be punished today, with the company trading on a lofty 27 times trailing earnings. There's no room in that kind of pricing for any downgrades, and as a result I expect shares will be sold off heavily.
Will things really get better in the next half?
There's been an unusually large number of companies forecasting weak first halves recently, while simultaneously saying 'things will get better in the second half.'
I'm not talking specifically about Isentia here, but another way of looking at it would be to imagine that a company is saying "business conditions are significantly poorer than we expected…but they will be much better in 6 months' time."
The trouble for shareholders is identifying whether that is hope, or a genuine forecast. If business conditions are worse than management expected, how can investors trust their expectation that conditions will improve, since they obviously failed to expect the downturn?
Lifehealthcare Group Ltd (ASX: LHC) is one company that recently delivered a better second half, after an abysmal first half was followed by the forecast of improvements in the second. Such forecasts can be accurate, which should be a ray of hope for Isentia shareholders.
In Isentia's case, if the downturn is really due to poor business strategy, a reshuffle and better business decisions could lead to today being a blip in shareholder memories. Yet if the company's recent decisions have damaged its reputation and caused clients to head elsewhere, the impact could be more long lived.
Either way, it looks as though the company is set to be repriced by the market in the near future.
